No, They Aren’t!

I recently read an article that began with the statement that “pensions and 401(k) plans are totally different retirement plans” – I agree. It then went on to state that “one isn’t better than the next” – I couldn’t disagree more! The economic crisis associated with Covid-19 has highlighted once again for me just how challenging, if not impossible, it is for individuals trying to manage a defined contribution retirement plan.

First, as we’ve discussed on many occasions, many (most) Americans don’t have either the financial means to fund or the investment skill to manage these complex programs. Couple that with the fact that they have to guess as to how long they will live in retirement, and you have a math problem that even the brightest at MIT struggle to solve. Third, many employers have taken the opportunity during this crisis to suspend or eliminate their contribution to an individual’s plan. Some will reinstate them when the economy reopens, but it isn’t a guarantee. So, the funding burden becomes even more challenging for the individual employee.

I would argue that there are few American workers that wouldn’t prefer to have their employer fund, professionally manage, and then disburse a guaranteed retirement benefit every month until one’s death. Sure, there is the issue of portability that makes defined contribution plans attractive to some, but studies have highlighted the fact that a considerable percentage of premature withdrawals are the result of individuals not rolling over their accounts to their new employers and taking the withdrawal instead when shifting jobs. Furthermore, loans, which are a very slippery slope, reduce the compounding of returns that are so critical to building an appropriately sized balance.

As we reported yesterday, companies have taken every opportunity during the last several decades to restrict wage growth and benefits, and the elimination of the traditional pension plan in the private sector in favor of the defined contribution plan epitomizes this trend. A 2018 study by the National Institute of Retirement Security (NIRS) found that 59% of working-age individuals had not saved anything for retirement. I understand that DB pension plans were not available throughout the private sector and at the peak of pensions only about 45% of workers were covered, but that 45% certainly had a greater likelihood of enjoying a dignified retirement than those Americans stuck in 401(k) plans as their primary retirement vehicle.

It would be wonderful if every American worker had access to both a traditional pension plan and a DC-type supplemental retirement vehicle. Regrettably, that ship has sailed. Today’s employee is unlikely to have access to a DB plan, and for many workers, they don’t even have an opportunity to invest in a DC plan. For those that do have the opportunity to invest in a DC plan, many participants treat them as nothing more than glorified savings accounts. Even Congress, through the CARES Act, is encouraging the use of retirement plans to bridge unemployment that has resulted from the Covid-19 crisis. This is just setting up more Americans to have little to retire on in the future. We have a retirement crisis, and little is being done to address it. Saying that pensions and DC plans are equally good is neither helpful nor true!

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